Australia floods: coal prices will rise along with the water level

London-listed mining groups remain tight-lipped about the impact of the
Queensland floods on their operations, but they are probably right to be
cautious. There's a chance the situation could get much worse.

Although it will take many months to pump the water out of affected mines in Queensland, the biggest problem will be with infrastructurePhoto: Getty Images

"The one thing that's certain is that everything is still uncertain," Rhys Kealley, lead energy analyst at Datamonitor, said. "The big issue is that the monsoon season runs until March – and there appears to be another off the coast."

There is, however, one thing on which everyone agrees; the price of coal is going to move higher.

According to the Commonwealth Bank of Australia, around 5pc - 14m tonnes - of coking coal, which is used to make steel, could be removed from the market due to the floods. John Meyer, head of mining at broker Fairfax, thinks that contract prices could well run back up to $300 per tonne following this disaster." The contract price currently stands at $225.

However, these price rises could be beneficial to the mining majors. "Surging prices will help miners offset the disruption to supplies, provided they can get back into production quickly," Mr Meyer said.

The biggest losers from the rains will certainly be the steel makers. Australia accounts for almost two-thirds of global exports of coking coal and manufacturers have already seen their margins pinched by the rising price of iron ore. On Thursday, South Korea's Posco, the world's third-largest steel maker, warned of sharply higher raw material costs.

"Coking coal supply will be also tight because of flooding in Australia and spot prices may rise sharply from the current contract level," Posco said.

Australia is also the second-largest exporter of thermal coal used in power stations, so an Australian supply crunch should give a boost to Indonesia, the world's largest exporter.

Shares in Vallar, Nathaniel Rothschild's mining investment vehicle, have risen 15pc this week. The company is expected to complete a reverse takeover deal in April that will see two major Indonesian thermal coal groups listed in London.

The US is the largest coal producer after China, and the major US producers should also see an earnings boost from rising prices.

The coal industry is under pressure on all fronts. "Every single exporting country has been hit with problems in recent weeks, be it weather or infrastructural constraints," says Amrita Sen, commodities analyst at Barclays Capital. "It is the perfect storm in many ways for coal. Four out of five of Queensland’s coal supply chains experienced difficulties in getting coal from mines to export facilities on the coast, while major rail lines used to transport coal, have all experiences periodic disruptions over the past two weeks.

"As a result, ports have been forced to operate at greatly reduced capacity while drawing down inventories to meet shipments. Since early December, we believe almost 3m tonnes of coking and 1m tonnes of thermal coal production has been lost, with producers indicating that a minimum of two weeks’ pumping is required to recover mines, although expected heavy rains in the short term will delay this further."

On Thursday, Xstrata, the world's biggest thermal coal exporter, said rail shipments to Richards Bay Coal Terminal in South Africa were also disrupted by train cancellations after heavy rain.

Although it will take many months to pump the water out of affected mines in Queensland, the biggest problem will be with infrastructure.

QR National, Australia's largest transporter of coal by rail, said several coal and freight lines have been hit by flood damage and landslides, but it could open some of its lines by January 20. However, many railway lines belonging to mines have been completely washed away, and the extent of the damage will not be known until the floods recede.

Coal supplies at Australian ports have been falling, so empty ships have been waiting at ports because they have no product to load. The first quarter is seasonally weak for shipping rates, but the Baltic Dry Index, a measure of freight rates, has been plunging because of the excess capacity. It costs up to $30,000 (£18,900) a day to keep these vessels idle, so shipping companies are likely to be hit hard.

The floods are also likely to be inflationary in Australia. Once the clean-up and repair work starts, there is likely to be a shortage of labour, given the huge scale of the clean-up required. "Unemployment is running at a low level there at the moment," Mr Kealley said. "Labour is hugely in demand and will cause inflationary pressure, as China continues to demand commodities."

Initial estimates suggest the floods could cost the global insurance industry up to $1bn, although re-insurers, including Lloyd's of London, are expected to cover at least half of the bill.